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Analysis and Prediction:

Date of publication: September 18, 2017 | Author: Tim Clayton

Last Week’s Summary

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Early in the week, there was relief that damage from hurricane Irma appeared to be less serious than expected which bolstered confidence in the US currency.

The US consumer prices (CPI) reading was stronger than expected with a 0.4% increase for August compared with consensus forecasts of 0.3% with a 1.9% annual gain. Core prices rose 0.2% on the month.

The data increased expectations that the Federal Reserve could increase rates again this year.

There was increased speculation that US tax reform would be completed this year which provided net support to the US currency.

The retail sales data was weaker than expected with a 0.2% decline for August, although the overall impact was limited, especially with uncertainties over the impact of hurricane Harvey. There was a strong reading for the New York Empire manufacturing index which helped underpin confidence.

The dollar was unable to hold its best levels with the currency index gaining less than 1% on the week.


UK data was mixed with a stronger than expected inflation report offset by a weaker than expected figure for average earnings. The inflation reading had greater impact with the annual CPI inflation rate increasing to 2.9% from 2.6%.

The Bank of England left interest rates on hold at 0.25% at the latest policy meeting with a 7-2 vote as McCafferty and Saunders again voted for a rate hike.

Although the decision was in line with consensus forecasts, Sterling moved very sharply higher. GBP/USD strengthened to 12-month highs near 1.3400 while EUR/GBP declined to 7-week lows below 0.8900.

Why did Sterling make strong gains?

This was an important example of where a policy statement is more important than the actual policy decision.

In its policy statement, most committee members expected that an interest rate increase would be necessary over the next few months and all members expected that rates would increase at a faster pace than expected by markets.

There was also an upgrading of inflation forecasts and bank Governor Carney stated that the risks of a rate increase had definitely increased.

Overall, there were stronger expectations of a rate increase in November which triggered strong Sterling gains, especially after Tuesday’s stronger than expected inflation data.

The UK currency made further gains on Friday with GBP/USD peaking at 14-month highs above 1.3600 while EUR/GBP declined to 2-month lows below 0.8800 after MPC member Vlieghe also suggested a rate hike was more likely.


There were limited Euro-zone data releases during the week and no major impact from ECB policy comments. The rhetoric overall confirmed that the central bank would be extremely cautious over removing policy accommodation.

Nevertheless, the Euro was resilient during the week with expectations that policy would eventually be tightened and EUR/USD held above 1.1900 on Friday.


There was a further missile test by North Korea, although the market response was relatively limited in comparison to previous tests with only brief support for the yen.

The Swiss National Bank left interest rates on hold at -0.75% following the latest policy decision and the Swiss franc weakened slightly.

Australian employment data was much stronger than expected, although there was little overall movement in AUD/USD on the week.

The New Zealand dollar was again unsettled by political developments with choppy trading conditions.

Next Week’s Forecast & Events

ECONOMIC OUTLOOK on grunge world map


Highlight of the week will be the latest Federal Reserve policy statement on Wednesday September 20th.  The Federal Reserve Open Market Committee (FOMC) will announce its decision on interest rates and issue a statement.

In addition, there will be updated projections on interest rates and Fed Chair Yellen will hold a press conference.

Could US interest rates be increased again?

In theory, rates can be increased at any meeting, but the Federal Reserve has been very reluctant to change rates without warning markets in advance. Ahead of this meeting, there has been no indication that there will be a rate increase and a move to hike rates is very unlikely.

The main focus of attention will be the hints whether rates are likely to be increased again this year.

There is also likely to be an announcement on starting to shrink the Fed’s balance sheet.

The US economic data is unlikely to have a major impact with the housing data due for release on Tuesday with the Philadelphia Fed index due for release on Thursday.


The latest UK retail sales data will be released on Wednesday with the release date having been delayed from last week.

The key for Sterling will be whether expectations of higher interest rates is sustained.

Political developments will be watched closely with Prime Minister May due to make a key speech on Brexit on Friday September 22nd.

There is likely to be further volatile trading in Sterling during the week.


The latest Euro-zone PMI data will be released on Friday with the flash readings for September. Confidence in the outlook will tend to increase if there is a monthly increase, although the main focus will be on the pricing components.

Evidence of higher inflation would increase pressure for the ECB to raise interest rates.

Political developments are likely to be the main focus with the German Federal election scheduled on September 24th. Another victory for Chancellor Merkel would tend to support the Euro and there would also be potential net support for Sterling on hopes for a more constructive stance on Brexit talks.


North Korea will remain an important focus, especially if there are further missile launches by the Pyongyang regime.

New Zealand will hold its General Election on Saturday September 23rd. The New Zealand dollar is likely to weaken in an immediate reaction if there is a win for the opposition Labour Party while a National Party win would tend to push the currency stronger in an immediate reaction.

Currency Forecast for Next Week

Currency pairSpot 1-week forecast1-month forecast


 timTim Clayton is a market analyst with more than 20 years of experience in the financial markets, with particular focus on currencies. Holds an economics degree from University of New York. Writes for multiple publications including and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics. 

Information expressed in this article and on as a whole does not constitute as financial advice. If you decide to make any actions based on the information you read, we shall not be held responsible.


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